Retail 4.0: moving from hard power to soft power

Why retailers must leverage ‘belonging’ to gain market share.

The retail industry is undergoing significant disruption caused both by digital technologies, highly-flexible processes, the availability of real-time information, and a rapidly evolving and demanding consumer. Retailers must act now to address all aspects and ultimately focus on the shift of power to the customer to remain competitive in today’s market.

In 30 seconds

Retail is undergoing significant disruption. The digital revolution has sparked more than a technological shift; it has brought about a sociological and psychological change in how people shop, and in their expectations of retail experiences.

The power in the relationship is shifting very much towards the consumer and away from retailers. Those that don’t respond to emerging customer demands risk losing customer loyalty and business.

This series of papers, with a global view and a focus on four countries, will help today’s retail executives understand how their companies can be part of the change at hand, and ready for the future.

The Retail 4.0 report set focuses on three emerging markets and one mature market in Asia and Africa. Much research has been done about established markets, especially in North America and Western Europe. BearingPoint believes that the emerging markets of China, Nigeria, and South Africa along with the mature market of Japan where a superior customer experience is a priority provide potential for retailers. [See: Key Markets side bar]

Findings

Neither ecommerce offerings nor bricks-and-mortar outlets are designed to meet the changing preferences of today’s customers.

Shopper preferences are shifting due to digital innovation, disruptive technologies, and emerging sociological and psychological patterns.

Customers are becoming less consumerist in an environment that is ripe with choice.

Customers are beginning to engage with retailers on a deeper level. They’re looking for a greater sense of community and belonging in their interactions with brands.

Some retailers are focusing on technology to address the growing change in customer preferences, and enhance their market share and profitability but also re-assess their product ranges and service offerings.

The Bricks-and-Mortar Paradox

There is a current belief that the digital revolution has brought about the end of bricks-and-mortar shopping. But is this really the case? Or have rumors of its demise been exaggerated?

Research from IHL Group published last year predicts a somewhat clearer future for physical retail space, contrary to mainstream reports of store closures and decaying high streets.

IHL found net US retail store openings to be steadily increasing. A survey of 1,800 chains with 50 or more stores revealed a net gain of 1,326 units during 2017. Combined with restaurants, this rose to 4,080. (note 1)

Instead of a gradual decline, the figures forecast a steady increase in new store openings. Such is the paradox facing retail today: if the future is digital, why are retailers opening new stores? And why are digital giants like Amazon and Alibaba embracing bricks-and-mortar?

Generational Factors

Today’s customers are made up of many generations. While some of these generations have more disposable income and must be seriously considered as today’s buyers, retailers must also look forward into the future to understand some of the preferences of the new generation. BearingPoint believes that Millennials are having an impact on the preferences of other generations. But how will the new generation be different? How will Millennials influence the future of customer experience? And how should retailers respond?

Millennials are socially conscious in almost every sense of the word – a factor that will influence their preferences and buying behavior in new and very different ways.

For today’s young consumers, social media and constant connectivity are second nature. As a result, they expect a great deal from the retail experience. Products availability anywhere at any time is now a basic requirement for Retailers, therefore they must raise the bar: experiential commerce tends to become commerce of influence, Retailers having to seduce their customers, ensuring a strong link with them and, more than that, giving them meaning in their purchases.

Innovations like Alibaba’s ‘magic mirrors’ demonstrate that even the keenest digital adopters don’t only want to buy online. They’re still seeking meaningful, connected and tangible relationships with brands.

From connection to belonging

E-commerce offers speed and convenience for shoppers and retailers alike. With social shopping already happening at scale in markets like China, it is bound to become even slicker in the future.

Friends still want to be with friends. All of us, regardless of age, crave a sense of community that goes beyond digital connections. Only by understanding these sociological and psychological needs can retailers begin to offer experiences that meet them.

BearingPoint sees an emerging trend in today’s retail market that is moving from connection and community to a sense of “belonging”. It demands that retailers understand the sociological and psychological factors of buying and that they identify with their customers, focus primarily on the personal, relationship with them, and provide them the sense of intimacy they seek.

Our Future of Retail series

The big questions for today’s retail executives are: what can they do to take advantage of digital technologies? And how can they harness sociological and psychological trends to influence buyer behavior and increase market share?

Over a series of three reports, we will explore this complex and challenging environment through the lens of our research among consumers and retail executives. We’ll take a global view, while focusing on the four markets outlined above, to truly understand the modern consumer.

Report 1 will explore how digital technology is driving the connection between retailers and shoppers, and between shoppers themselves. It will look at the move towards a new kind of consumerism, and how this is influencing buyer behavior. It will also consider the achievements retailers have made to date, and what they need to do next.

Report 2 will examine how the future of the sector is being shaped in each of our four markets. Is China defining the future of retail? How are Nigeria & South Africa developing specific usages to overcome a lower level of physical infrastructure? How do Japanese retailers leverage the personal technology their customers love to create quality experiences?

Report 3 will envisage the global retail landscape in 2030. The final part in our series will ask: are today’s emerging consumer habits a blueprint for the future? What lessons can be learned by studying China, Nigeria, South Africa and Japan? What must retailers know now so as to understand what lies ahead? And most crucially, what must they do to be among the winners?

Recommendations

Retailers should:

Restructure the shopping experiences they offer to foster business and people communities, connections and belonging

Define their identity clearly and identify the space they want to be recognized for while leveraging big data and new partnerships to develop “soft power”

Consider the impact of sociological and psychological patterns, and organize their resources to meet the resulting demands

Gain the trust of their customers through the traceability and transparency of their entire supply chains deploy technology in innovative and disruptive ways that suit how customers think and buy

Key markets

China can be seen as a ‘laboratory case’, given its growing and increasingly affluent middle class, its rapidly changing retail environment, and the stimulus of actors who focus on new technologies and new models of retail. Plus, with around 10% of the store density of the US market, it is a still relatively blank page in terms of the evolution of the sector.

Nigeria shares some characteristics with the Chinese market but in a completely different part of the world. It is distinct in that includes technology and business in more equal measure. It, too, has a rising middle class, and represents a blank canvas of possibilities. In addition, there is a shortage of physical retail infrastructure – an issue that’s often resolved through the smart use of technology.

South Africa is another country with a rising middle class, and an undeveloped physical retail presence. But as a more established market, it lacks the untold potential of China or Nigeria.

Japan has, of course, been a highly-developed market for much longer than the other three countries. And it is highly focused on the latest personal technology, and on offering a superior customer experience.

Xavier Baudouin, Associate Partner, BearingPoint Paris
Xavier, an Associate Partner at BearingPoint’s Consumer Goods, Retail & Luxury team, has over 20 years of experience in consulting and in startups, mostly focusing on innovative B2C projects. He has a strong track record in carrying out and supervising digital and customer management transformation assignments for various clients. He is the author of a white paper on the impact of eCommerce on shopping malls, and of another BearingPoint Institute report “Will PreMillenials Save Retail?” (2015).
xavier.baudouin@bearingpointinstitute.com

The authors would also like to thank Tanja Schwarz and Sharon Springell from the BearingPoint Institute, Daryl Newman from Grist Ltd and Benedict Cooper as well as the team at WSL who conducted the research.